Raising Credit Scores Can Be Inflation-Fighting Strategy

Regardless of what the macroeconomic climate is, it’s always a good idea to endeavor to have a “good” credit score. To be precise “very good” is defined as the 740 to 799 (out of 850) range.

Within that spectrum, borrowers are likely to be able to qualify for large credit limits on credit cards, low interest rate auto loans, and yes, mortgages at favorable terms. Maintaining good credit isn’t just about what it provides access, but also about what it helps consumers avoid. Namely high interest rates and elevated monthly obligations.

These days, those scenarios are amplified because amid record high auto loan and credit card delinquencies, it’s not a stretch to say that inflation has, in some cases, impaired consumers’ ability to service other obligations. That implies that, although under-discussed, there are inflation-fighting rewards in maintaining good credit.

Proof Is in the Pudding

Consider the following research courtesy of LendingTree: the difference between a loan made to a fair credit borrower (580 to 669) and those in the very good camp can work out to be as big as $92 a month, or nearly $1,200.

Over time, that $1,200 per year really adds up and it can lead to more dinners out, vacations and, most importantly, fortified savings and investment. The latter two points are obviously meaningful to advisors, confirming there are benefits in helping clients build budgets and pare debt.

“Borrowers with four common debt types — credit cards, personal loans, auto loans and mortgages — could save $22,263 over the lifetime of the credit and loans by improving their credit score from fair (580 to 669) to very good (740 to 799),” notes LendingTree.

Of that figure, 75%, or $16,677, is mortgage savings. Alright so roughly $17,000 isn’t a Powerball jackpot, but it is more than two years of contributions to an IRA.

Another Reason Good Credit Matters When Inflation Is High

Yes, the pace of inflation is cooling, but that doesn’t mean a pass should be extended for the havoc that was wrought in 2022. Plus, prices (and interest rates) haven’t come down.

With the Federal Reserve raising interest rates 11 times from the start of 2022 through last year, the savings realized by those with good credit were slashed as APRs rose. That $22,263 mentioned above was more than $49,000 in 2022 and $51,694 in the third quarter of 2019.

“The average difference in APR between a fair credit score and a very good credit score for credit cards was 7.00 percentage points in 2019, but that dipped slightly to 6.96 percentage points in 2023. However, the amount borrowed spiked from $3,668 in 2019 to $6,993 in 2023 — which means a better APR certainly made more of a difference in 2023,” adds LendingTree.

One way of looking at that is that if those with very good credit are seeing cost benefits of good credit pared when interest rates/inflation are high, it’s reasonable to surmise that those two factors present considerable headwinds to borrowers in the fair and worse credit ranges.

Related: A Financial First Worth Remembering